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Creditors in Your Closet.

Let this debt-management plan rescue you from a haunted past

IT WAS IN TAN GOODJIONES' SENIOR YEAR AT ATLANTA'S MORRIS BROWN COLLEGE IN 1983 that the high-interest department-store credit cards started pouring in. She received Macy's, J.C. Penney, and Sears cards. Even a Rhodes Furniture card came in the mail, although she lived in the dormitory and did not need it. She happily, and nonchalantly, ran all of her credit cards up to their limits. Although Goodjiones worked, she earned minimum wage working for merely 10 hours per week in her college's work-study program.

"Due to youth and immaturity, I felt that I could pay my bills when I got ready. If the minimum due was $20, I would pay half that or nothing at all--not realizing there was such a thing as a credit report," says Goodjiones, now a counselor for Brown's Mill and Dunaire Elementary Schools in DeKalb County, Georgia. "At one point, when my friends and I `maxed out' one of our credit cards, we just threw it in the trash."

Upon graduating from college, Goodjiones proceeded to acquire additional debt with other credit cards at Rich's and Bloomingdale's department stores. According to Myvesta.org (formerly Debt Counselors of America), a nonprofit financial service organization, the youthful Goodjiones was hardly alone. Its November 2000 Credit Card Survey revealed that the average 18- to 24-year-old owes $827 on two credit cards.

Goodjiones never realized the ramification of having negative credit until nearly a decade later when she attempted to get a major credit card in 1992 and was turned down. Soon after, she inquired about purchasing a home and was informed that she didn't qualify because of her credit rating. She finally internalized and understood the magnitude of her youthful mistake.

"I felt like the system was to blame for marketing to college students who barely know how to handle their own personal lives," Goodjiones contends. "It was a struggle to get past that. I thought, `Now I know what to do. Can I get another chance?'"

Her question is one that many consumers find themselves asking as a result of being plagued by similar debt issues. Whether you have a negative credit report because you "maxed out" your credit cards during your college days, or you had your home foreclosed, or your car repossessed, or you are currently in arrears on your student loans--you no longer have to be haunted by the creditors in your closet. We've polled experts in credit counseling organizations and companies that extend credit to consumers for answers on how you can face your past and address your former credit mistakes so you can make major purchases, such as a home and a car in the near future. Here's what they suggest:

OWN UP TO YOUR MISTAKES

By now, you've probably found out that you can't keep hiding from your past. Admitting that you have a problem is the first step toward making a change. After coming to terms with your credit problems, you should be proactive. Search the Internet for articles on credit repair and read books, such as Mary Hunt's Debt Proof Living: The Complete Guide to Living Financially Free (Broadman & Holman Publishers, $14.99), for suggestions. Also get in the habit of opening your mail and answering your phone--even when you know it's related to a bill. The only way you can start repaying some of your creditors is to know what you owe.

Although Goodjiones mistakenly avoided seeking advice from a financial advisor because she feared the expense, she still conducted her own research. "I realized I needed access to self-help literature," she says. "So I went to the library to do research, read money management magazines such as BLACK ENTERPRISE, and joined an investment club."

GET YOUR CREDIT REPORT

As our experts stated in Part 1 of this series, every consumer should order a copy of his or her credit report at least once a year. You can call, write, or go online to the three major credit bureaus (see "Creepin' Credit Errors," September 2001).

"Be in control of the situation. Get a new credit report several months before you apply for credit and know what it looks like. That will give you equal footing with the lenders," says god Griffin, manager of public affairs for Experian. "Talk to various lenders and get rates. Don't apply at that point. Get pre-qualified, as opposed to pre-approved. The process is less complicated and gives you an idea of what your interest rates will be."

CHANGE YOUR PAYMENT HABITS

Goodjiones soon learned that paying the minimum on the credit cards she did manage to obtain was getting her nowhere fast. She took large portions of her paychecks and IRS returns to pay off and to close each of her credit cards. Soon afterward, she was debt-free. She currently has a single VISA credit card, a brand new 1999 Toyota Camry, and the beautiful home that she's always wanted in the King's Glen subdivision of Decatur--all at the prime interest rate.

As with Goodjiones, you must bring all of your late payments up to date if you want to establish a positive credit history. This requires that you continue to make timely payments on your monthly accounts and pay off your delinquent debts. "The good news is, just because you have negative credit on your report, such as a repossession, doesn't mean you're a horrible risk," assures Griffin. "Lenders do look at the amount of time that has passed since you had late accounts. While your credit report is not perfect, that doesn't mean that you will not get credit."

SEEK EXPERT ADVICE

According to the National Foundation for Credit Card Counseling (NFCC; www.nfcc.org), 1.3 million American families filed for personal bankruptcy in 1999. Do not prejudge your credit. Before taking the drastic step of filing bankruptcy, seek the counsel of hordes of consumer assistance organizations that can help you lower your debt and reclaim control of your own financial destiny.

The Consumer Credit Counseling Service (CCCS; www.cccsintl.org) offers consumers free counseling sessions in person that include how to reduce spending, use credit wisely, manage money, build a savings plan, and develop and balance a budget. It has merged with Money Management International (www.mmintl.org) to offer clients the same counseling sessions by telephone 24 hours a day, seven days a week.

"If you choose our debt management plan, we will contact your creditors and have them lower or eliminate your interest rates, reduce your monthly payments, and stop collection calls," says Brenda Freeman, education specialist for community affairs for CCCS on the Gulf Coast. "We are helping you to restructure your credit when you enter counseling and make on-time payments for six months to a year. The creditor will see that you've made a commitment to change your rating; this is how you reestablish positive credit." There is a monthly charge for the debt management plan that ranges nationally from $0 to $50, according to income.

CCCS has partnered with two car dealerships and 14 mortgage companies in Houston. As a result, clients are able to purchase new cars and homes as they complete the program at lower interest rates than most lenders will extend to high-risk borrowers. "It is wise for dealerships and mortgage companies to partner with CCCS. Our clients are very valuable because they have proven themselves responsible and are debt-free," says Freeman.

Myvesta.org and Capital One Financial Corp. have partnered to distribute a free publication to young people entitled Plastic Power for Young Adults, which offers strategies on using credit cards. You can download a copy from www.myvesta.org.

"I think that we, as consumers, especially young people, should be educated about our credit report so that we will be empowered," says Goodjiones. "Churches, fraternities and sororities, social and civic organizations should have a credit counseling specialist to come out and speak to them. It should definitely be included in high school curricula. It is my goal to become a high school counselor. I will definitely advise the students about credit. If it were taught in my high school, I would be a different person."

The Association of Independent Consumer Credit Counseling Agencies (AICCCA; www.aiccca.org), having 50 member agencies, can also assist you. Its member agencies offer various educational programs. One is arming its clients with the tools to avoid deals with unscrupulous lenders.

"It is common practice that predatory lenders have consumers believe that their credit is actually worse than it is," says Joel Greenberg, a board member of AICCCA and president of Garden State Consumer Credit Counseling Inc. "They do not make their credit scoring guidelines available to individuals since they are not required to do so by law. It is best to shop around for the best interest rate and to go into the process armed with knowing what's on your credit report."

RECLAIM YOUR CREDIT

Now that you know what is on your credit report, paid off all of your delinquent accounts, and gotten expert advice, it's time to get the credit you deserve.

* Drive Away With the Best Deal. Recognizing that one in five adults have had credit trouble such as repossessions, foreclosures, and bankruptcies, Fairlane Credit Co. (www.fairlaneeredit.eom) was formed in 1997 to give these consumers an alternative to the high-interest loans car dealers traditionally offer them. Fairlane's Advantage Program allows high-risk consumers to purchase a new entry-level vehicle or a dependable used car (no more than 3 years old) and to finance it at a credit card rate. After paying on time for two years, the interest rate goes down to market rate. The customer also qualifies for the pre-approval program, which allows them to buy their next new car directly through Ford Motor Credit, alleviating the high-interest rate. "Our goal is to allow people to rehabilitate themselves through the Advantage Program," says Jerry Heimlicher, president of Fairlane Credit. "When you can make a fair profit and also help people, everything is all right in the world."

* Purchase Your Dream Home. It is a myth to believe that because you have negative credit, you can not finance your home through a major or mainstream mortgage lender at a decent interest rate. According to Hugh Rowden, assistant vice president for First Union Mortgage Corp., it is important to understand how credit impacts an individual's life. "I go over the credit report to see if anything happened to cause the problem. There could be extenuating circumstances such as death or illnesses," says Rowden (www.hnghrowden.com). "Have third-party documentation to support the circumstances such as medical, legal, or even police reports." The credit bureau will also allow you to offer explanations in the form of a statement of up to 100 words on each account. This will give a prospective lender an understanding of why your payments were late.

First Union will finance consumers with past credit problems at market interest rates (or near market rates) on conventional loans after 12 to 24 months' good payment history and bankruptcies and repose. sessions are more than 48 months old. FHA loans are less stringent and require 12 months of no late payments and bankruptcies and repossessions more than 24 months old. All judgments or collections must have been satisfied. "We do have risk-based pricing programs additionally that range from 1/4% to 1 1/2% above the market rate. Our highest risk-based program is Timely Payment Rewards, which automatically reduces the interest rate by 1% after 24 months of consecutive timely payments," says Rowden.

* Use Your Credit Card Wisely. You should have one major credit card on hand for emergencies, car rentals, tracking big-ticket items, and ordering via mail or the Internet. Just don't abuse its use or you will slide back into financial disarray. To help you find the credit card that offers you the best rate, sign onto CardWeb.com, an Internet company that distributes information relating to all types of payment cards. "If you have less than perfect credit, you still should not pay more than 4% over the prime-interest rate," says Robert B. McKinley, CEO of CardWeb.com. "There are 6,000 credit card issuers in the United States. Use the leverage to negotiate a lower rate. Go to your personal bank or credit union since they have some knowledge of you."

If you don't have any luck there, try a secured credit card. You will have a savings account with your own money gaining interest and will use it as collateral for your own credit card. Typically, whatever you have in your savings account is what your credit line will be. Therefore, it can be as high as you would like. Make sure that you have the company report it to the credit reporting agency. Many secured card companies do not. "Most no money down, no security deposits for bad credit are rip offs. They will extend a $400 credit line to you, but charge $350 immediately in various fees," says McKinley. "The best route is the security card. It is very important in rebuilding your credit."

Jessica Hanford, 38, knows the value of rebuilding credit firsthand. In 1987, Hanford found that she could not get a new car loan because of delinquent accounts including Sears, Macy's, Zales Jewelry credit cards, and a previous car loan. "I knew better and knew the importance of good credit. But I did not know that it would follow me for seven years. I got caught in that trap and my defense was to say it wasn't so bad. But when I started trying to make major purchases, I realized that was not the case," said Hanford.

In 1993, she was able to rebuild her credit when she paid a credit repair company in West Palm Beach, Florida, to clean up her credit report. Although Hanford was well aware that she was paying money to a company to do something that she could essentially do for herself (see sidebar), she felt it was worth it.

Hanford now enjoys her home, newly financed through FHA, and vows to instill in her 7-year-old daughter, Tenia, the importance of good credit. Goodjiones vows to do the same with her daughter Kayla, 9. Says Hanford, "Bad credit can happen to the best of us. The important thing is to work hard to get your credit straight and keep it that way."

12 Ways to Create a Positive Credit History

1. Pay your bills in full and on time.

2. Set up a budget and live within it.

3. Pay attention to debt-to-income ratio. Creditors prefer that no more than 20% of gross pay be spent on credit, excluding mortgage.

4. Maintain one major credit card.

5. Apply for only the credit you need. Too many recent inquiries may indicate outstanding debt that has yet to appear on your credit rating.

6. Maintain balances far below your credit limit.

7. Show stability. Creditors may consider length of residence and employment, savings accounts, and whether you own or rent.

8. Contact your lenders if you fall behind. They may work with you. Never ignore them.

9. Establish credit on your own for the first time and start out small.

10. Don't use credit repair clinics to remove inaccurate information. You can do that yourself for free.

11. Do not co-sign for anyone else.

12. You and your prospective spouse should review credit reports and openly discuss finances before saying "I do."

Source: Experian Credit Reporting Agency
COPYRIGHT 2001 Earl G. Graves Publishing Co., Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 2001, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

Article Details
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Title Annotation:debt management
Author:ROYAL, LESLIE E.
Publication:Black Enterprise
Geographic Code:1USA
Date:Oct 1, 2001
Words:2591
Previous Article:Shooting for Big Returns.
Next Article:How to Land a Job in a Tight Economy.
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